A company is financed by debt and equity, and each has a price. Debt is cheaper, partly because interest is tax-deductible, but too much raises risk. The weighted cost of capital is the hurdle rate for new investments.
How to use the Cost of Capital Calculator
- Risk-free rate
- Equity beta
- Market risk premium
- Pre-tax cost of debt
- Tax rate
- Market value of equity
- Market value of debt
Results update as you type, and every field accepts the units shown in its menu.
How it works
Enter the CAPM inputs for equity, the pre-tax cost of debt and tax rate, and the market values of equity and debt.
Tips
- Take figures from the same financial statements and the same fiscal year.
- Compare ratios with companies in the same industry, not across industries.
- Use several valuation measures together; no single ratio tells the whole story.
- Market prices change every second – refresh the share price before you rely on a result.
Common mistakes to avoid
- Mixing per-share figures with company totals.
- Using trailing earnings for one company and forward earnings for another.
- Forgetting dilution from options and convertible securities.
Inputs explained
| Field | What to enter |
|---|---|
| Risk-free rate | In % |
| Equity beta | A number |
| Market risk premium | In % |
| Pre-tax cost of debt | In % |
| Tax rate | In % |
| Market value of equity | Amount in your currency |
| Market value of debt | Amount in your currency |
What each result means
- Cost of equity = [Risk-free rate] + [Equity beta]×[Market risk premium]
- After-tax cost of debt = [Pre-tax cost of debt]×(1 – [Tax rate]÷100)
- Equity weight = [Market value of equity]÷([Market value of debt] + [Market value of equity])×100
- Cost of capital (WACC) = [Market value of equity]÷([Market value of debt] + [Market value of equity])×[Cost of equity] + [Market value of debt]÷([Market value of debt] + [Market value of equity])×[After-tax cost of debt]
Example values
How the main result changes when Risk-free rate changes and everything else stays at the example values above:
| Risk-free rate (%) | Cost of capital (WACC) (%) |
|---|---|
| 2.1 | 7.26 |
| 3.15 | 8 |
| 4.2 | 8.75 |
| 5.25 | 9.49 |
| 6.3 | 10.23 |
| 8.4 | 11.71 |
Formula
Cost of equity = risk-free rate + β × market risk premiumAfter-tax cost of debt = pre-tax cost of debt × (1 − tax rate)Cost of capital = E ÷ (D + E) × cost of equity + D ÷ (D + E) × after-tax cost of debtWorked example
Inputs — Risk-free rate: 4.2 %; Equity beta: 1.1; Market risk premium: 5.5 %; Pre-tax cost of debt: 6.5 %; Tax rate: 21 %; Market value of equity: $600,000,000; Market value of debt: $250,000,000.
Results — Cost of equity = 10.25 %; After-tax cost of debt = 5.14 %; Equity weight = 70.59 %; Cost of capital (WACC) = 8.75 %.
Frequently asked questions
What is the cost of capital?
The return a company must earn to satisfy its debt and equity investors.
Why use after-tax cost of debt?
Interest is tax-deductible, which lowers its real cost.
Should I use book or market values?
Market values reflect what investors would pay today.
What formula does the Cost of Capital Calculator use?
Cost of equity = risk-free rate + β × market risk premium.